Securities and Exchange Commission v. Nadel et al

Filing 1285

MEMORANDUM in support re 1272 Order on motion to stayOrder on Motion for Order to Show CauseOrder on Motion for Leave to File Receiver's Supplemental Brief filed by Burton W. Wiand. (Attachments: # 1 Exhibit Exhibit A - SEC v Nadel Hearing Transcript of 03-22-17 Hearing)(Maglich, Jordan)

EXHIBIT A 

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IN THE UNITED STATES DISTRICT COURT
MIDDLE DISTRICT OF FLORIDA
TAMPA DIVISION

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SECURITIES AND EXCHANGE COMMISSION, )
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Plaintiff,
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) Case No.
vs.
) 5:09-CV-00087-T-26MAP
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ARTHUR NADEL, et al.,
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Defendant.
)

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____________________________________________________________
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MOTION HEARING
BEFORE THE HONORABLE RICHARD A. LAZZARA
UNITED STATES DISTRICT JUDGE

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MARCH 22, 2017
10:53 A.M.
TAMPA, FLORIDA
____________________________________________________________

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Proceedings recorded by mechanical stenography,
transcript produced using computer-aided transcription.
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DAVID J. COLLIER, RMR, CRR

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FEDERAL OFFICIAL COURT REPORTER
801 NORTH FLORIDA AVENUE, 7TH FLOOR
TAMPA, FLORIDA
33602

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APPEARANCES:

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For the Plaintiff:

Robert K. Levenson
Securities & Exchange Commission
801 Brickell Avenue, Suite 1800
Miami, Florida 33131
[phone]

For the Receiver
Burton W. Wiand:

Gianluca Morello
George Guerra
Wiand Guerra King, PL
5505 West Gray Street
Tampa, Florida 33609-1007
[phone]

For Respondent
Byron W. Hatchett:

Byron W. Hatchett (pro se)
P.O. Box 3374
Abilene, Texas 79604

For Respondent
John Hatchett Carney:

John Hatchett Carney (pro se)
10541 Berry Knoll Drive
Dallas, Texas 75230

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ALSO PRESENT:

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Burton W. Wiand

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P R O C E E D I N G S

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- - - o0o - - THE COURT:

Madam Clerk, would you please call the

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THE CLERK:

Yes, Your Honor.

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This is Case Number 8:09-CV-87-T-26TBM, Securities

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case.

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Exchange Commission versus Arthur Nadel, et al. and Burton

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Wiand, receiver, versus Quest Leasehold -- Leaseholder.
THE COURT:

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All right.

Counsel, would you please

state your appearances.
MR. MORELLO:

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Good morning, Your Honor.

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Gianluca Morello on behalf of the receiver, the receiver is

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here as well, and my law partner, George Guerra, from

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Wiand Guerra King is also here.

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MR. LEVENSON:

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THE COURT:

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MR. CARNEY:

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Gentlemen?
Your Honor, John Carney, appearing

pro se.
MR. HATCHETT:

THE COURT:

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MR. HATCHETT:

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Byron Hatchett, appearing pro se,

Your Honor.

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Bob Levenson on behalf of the SEC.

Are either of you lawyers?
Yes, sir, I'm licensed in the

Northern District of Texas as well as the State of Texas.
THE COURT:
you represent?

All right, Mr. Hatchett.

And who do

Are you representing anybody in this matter

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besides yourself?
MR. HATCHETT:

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Besides myself, no, Your Honor, and

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I have never represented to anybody, whether -- at any time

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that I represented anybody other than myself as a mineral

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owner.

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THE COURT:

All right.

Thank you.

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Now, I received an e-mail yesterday from

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Ms. Bedell, my law clerk.

Mr. Morello, she says that you

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had called her and that the Railroad Commission through the

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Texas Attorney General will not be showing up and does not

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oppose the motion.
MR. MORELLO:

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The call that I received from the

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representative of the Texas Attorney General's office on

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Tuesday, I believe, or Monday, was that he had spoken to --

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it was Mr. Shelton, was his name, he had spoken to the

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Railroad Commission, he wasn't 100 percent affirmative but

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he said he did not think they were going to take a position,

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and if they were going to, they would file something and

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notify us, and I haven't heard anything from them.

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THE COURT:

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MR. MORELLO:

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I haven't heard anything either.
So the last indication I had was

that they were not taking a position on this motion.
THE COURT:

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Well, the dispute, it seems to me, and

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you correct me if I'm wrong, is whether this lease is still

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in effect.

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MR. MORELLO:

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THE COURT:

That is the up -Mr. Carney and Mr. Hatchett say --

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everybody have a seat -- say it ended, what, in April of

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this year?

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receiver, Mr. Wiand, takes a different position.

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it?

That's what they say.

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MR. MORELLO:

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THE COURT:

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MR. MORELLO:

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What is

That's correct.
What's your position?
Our position, Your Honor, is that

the lease has essentially a provision that allows it to -THE COURT:

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And apparently the

clause?

What do you call it, a habendum

Did I pronounce it right, Mr. Hatchett?
MR. HATCHETT:

I believe that's correct,

Your Honor.
THE COURT:

So even though the term of the

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five years technically ends, if certain steps are taken it

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continues on.

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MR. MORELLO:

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THE COURT:

That's correct.
Okay.

Well, I want to ask you this.

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Of course, Quest is kind of separate and apart from the

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other relief defendants, correct?

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MR. MORELLO:

It was brought in later.

It's part

of the same receivership, but, yes, it was -THE COURT:

Well, we're only interested in the

people who supposedly lost money in Quest; is that correct?

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We're not going to distribute any of its assets to the

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other --

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MR. MORELLO:

No, that's incorrect, Your Honor.

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So the way the process is going to work is the majority of

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Quest was funded with money from our scheme.

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THE COURT:

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MR. MORELLO:

$6 million, right?
And I believe it's a 60 percent

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stake or somewhere close to 70 percent.

So when the Quest

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assets are sold, the proceeds will come in and they will be

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distributed pro rata among Quest's creditors, essentially.

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The largest creditor will be this receivership estate, so a

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distribution will be made to this receivership estate, which

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will then distribute the money to the Arthur Nadel victims.

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All of the other Quest investors who filed claims will then

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get a pro rata distribution as well from the Quest proceeds.

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THE COURT:

How many people does that equate to?

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MR. WIAND:

Judge, there's over --

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THE COURT:

Have a seat, Mr. Wiand.

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MR. WIAND:

I think we have over 100 claims filed

Have a seat.

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with respect to what I would call the Downey victims, and my

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thought on this was -- and as you know, I'm creating this

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essentially as a separate receivership.

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THE COURT:

That's what I thought, yeah.

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MR. WIAND:

And that one of the claims filed in it

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that I'm going to consider, I'll probably recommend to the

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Court, is that we do pro rata with respect to the money that

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came out of the Nadel victims and the money that came out of

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the Downey victims.

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THE COURT:

Well, what assets does Quest have?

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MR. WIAND:

Quest has three leases, Judge, and

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plus a lot of equipment and a house.

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THE COURT:

What's the total value, do we know?

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MR. WIAND:

The total value is a little over

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2 million, I think.

During this period of time I have been

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actively attempting to liquidate this thing.

Indeed, I have

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on the table a proposal that I just received that would

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hopefully close April 10th to get rid of the leases.
THE COURT:

And that would include the Hatchett

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MR. WIAND:

It would, Judge.

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THE COURT:

-- as an asset?

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MR. WIAND:

It would, Judge.

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THE COURT:

Have you discussed this with

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lease --

Mr. Hatchett and Mr. Carney?
MR. WIAND:

Early on, Judge, we advised not

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Mr. Hatchett, we advised his father, and we also advised

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Mr. Carney what we were doing with respect to these leases

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and that the program was that we were going to maintain the

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properties, look for a competent investor/operator who would

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be able to operate these leases for the benefit of paying

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for them for the investors and then operate them so that the

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leaseholders are -- the landowners or mineral rights owners

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would begin to again receive money from the operation of the

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leases, and I think that the group that I'm currently

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receiving things from is such a group that has definitely

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the power to do that.

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THE COURT:

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MR. CARNEY:

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The answer is no, Your Honor.

The answer is no, they have not.

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THE COURT:

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MR. CARNEY:

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Mr. Carney?

He hasn't?
They have not discussed this

potential sale or any potential sale with us.

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THE COURT:

Who did you talk with, Mr. Wiand?

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MR. WIAND:

I was present when Mr. Guerra

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described this to Mr. Carney a number of years ago.

With

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respect to each individual offer -- this has been a saga,

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Judge, with oil prices going up and down, trying to get this

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thing sold, but I've had a couple of deals that have come in

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and I have not -- some of them have walked away, one of them

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I even got to the point of preparing a motion for the Court

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and then it fell apart, and I haven't had a specific

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conversation with Mr. Carney about this, I have had a

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conversation as late as yesterday with a number of the other

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mineral owners about what I was doing with this and they

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said, fine, go forward with it.

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THE COURT:

Who?

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MR. WIAND:

Mr. --

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MR. MORELLO:

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Peter Gryska was the individual we

spoke to yesterday.
MR. WIAND:

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He was speaking to us on behalf of

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himself and his brothers and others, who own a significant

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portion of this.

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THE COURT:

Of the Hatchett lease?

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MR. WIAND:

Yes.

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THE COURT:

Do you know Mr. Gryska?

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MR. CARNEY:

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of the Hatchett lease, Your Honor, and he is our cousin.

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THE COURT:

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MR. CARNEY:

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Have you talked to him?
I have not heard anything about a

sale from counsel or Mr. Gryska.
THE COURT:

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Mr. Gryska owns a very small portion

Assuming Mr. Wiand was able to find --

have a seat and just relax.
Assuming Mr. Wiand was able to find someone to

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purchase the assets and that person was a reputable person,

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would that satisfy -- by the way, how many people are

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involved with regard to the Hatchett lease?

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are there?

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MR. CARNEY:

How many people

Your Honor, there are less people

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than there were two years ago.

Mr. Hatchett's father has

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passed, my father has passed, and --

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THE COURT:

And I assume that your fathers left

their rights to you two?

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MR. CARNEY:

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MR. HATCHETT:

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THE COURT:

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MR. CARNEY:

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Yes.
That's correct, Your Honor.

All right.

So who else?

Gryska?

The Gryskas, Sarah Tucker, Janece.

Jim Hatchett is probably the single largest owner.
THE COURT:

And how is he related to you,

Mr. Hatchett?
MR. HATCHETT:

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THE COURT:

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MR. HATCHETT:

He is my father's

brother, Your Honor.

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He is my uncle.

All right.
It would be -- Sarah Hatfield

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probably owns the largest portion, probably a third of the

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Hatchett minerals.

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THE COURT:

And there's no one person that speaks

for all of you?

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MR. CARNEY:

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MR. HATCHETT:

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MR. CARNEY:

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No, sir.
No, sir.
There are 27 separate leases,

Your Honor, and if the activity -THE COURT:

Wait a minute.

What do you mean by

27 separate leases?
MR. CARNEY:

There's 27 separate leases that are

required to be held by production if not within the primary

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term.

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intact, that's all they could potentially be holding at this

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point.
THE COURT:

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So at most there's 1/27th of the original lease

You've lost me.

I thought there was

just one lease that all of you signed.
MR. CARNEY:

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It's 27 separate tracks leased, and

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they each have to be held separately, either during the

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primary term of five years or by production after the

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five year period, and if one section is held, it doesn't

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hold the entire lease, it only holds the 1/27th.
THE COURT:

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me now.
MR. CARNEY:

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THE COURT:

That's the

But there's only one Hatchett --

there's only one lease, correct?
MR. CARNEY:

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I'm sorry, Your Honor.

way the lease is written.

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I must admit, you've kind of confused

There's one written document,

Your Honor.

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THE COURT:

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MR. CARNEY:

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THE COURT:

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MR. CARNEY:

Yes.
But you're telling me that there are

27 separate entities?

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One written document.

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27 separate parcels leased under that

lease.
THE COURT:

Okay.

But --

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MR. CARNEY:

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160-acre section.

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THE COURT:

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MR. CARNEY:

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THE COURT:

MR. CARNEY:

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THE COURT:

MR. CARNEY:

No, sir.
Well, what if someone wanted to come

They have to negotiate with each

owner.

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THE COURT:

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MR. CARNEY:

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THE COURT:

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We go back to my original statement.

in and re-lease these 27 separate parcels?

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The minerals are owned jointly and

There's no one who speaks for everyone?

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And who owns -- who are the people --

severally by the Hatchett-Gryska-Carney family.

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One well only holds one section, one

With each owner?
Yes, sir.
Why do you contend the lease has

expired?
MR. CARNEY:

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Your Honor, the lease expired because

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there was no production after the five years to hold the

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lease, there was no activity to hold the lease.

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remain unplugged.

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The liabilities are substantial.

THE COURT:

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The wells

What liabilities are you talking

about?
MR. CARNEY:

Well, the well plugging liabilities.

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And in my response, Your Honor, I identify a toxic oil spill

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that's very problematic and unfinished roads and

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road damage.

Substantial liabilities, Your Honor.

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THE COURT:

Mr. Morello?

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MR. WIAND:

Can I speak to it, Judge?

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THE COURT:

Yeah, go ahead, Mr. Wiand.

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MR. WIAND:

Your Honor, with respect to the lease,

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it provides a number of different ways that the lease is

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held.

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was coming out until February of 2016.

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time we began efforts to begin drilling on the property,

There was some minimal production that came out -After that period of

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which also the lease indicates if we're doing -- if we're

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moving forward with drilling, if that's the case -- we even

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went to the extent of, you know, identifying the locations,

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doing the geology, and then we even filed with the Railroad

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Commission and received a permit to drill the well and we

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sent a check to Mr. Hatchett that was required by the lease

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prior to beginning any drilling, and that's when all this

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started.

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THE COURT:

Which Mr. Hatchett did you send it to?

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MR. WIAND:

I think it was sent to Byron Hatchett,

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THE COURT:

Did you receive a check, Mr. Hatchett?

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MR. HATCHETT:

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I believe.

Your Honor, I have not received a

check.

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THE COURT:

Did it go to your father?

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MR. HATCHETT:

My father was deceased in 2014 and

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I doubt very seriously it went to him.
MR. WIAND:

Excuse me, Judge.

I'm sorry.

It went

to Mr. Carney.

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THE COURT:

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MR. CARNEY:

Mr. Carney?
Your Honor, we settled a check up on

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sale of proceeds from before the receivership that were held

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in suspense because Mr. Bill Hatchett, Sr. had contacted the

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purchaser of the oil from Quest but before the receivership

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and the monies were held in suspense.

After protracted

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negotiations with the receiver, we agreed to split the money

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50/50, he took half, we took half.

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from before the receivership, and any representation that

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this constitutes production during the receivership is a

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false statement.

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MR. WIAND:

This was sale proceeds

Judge, I think we're passing in the

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night here.

The lease requires prior to drilling that you

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have to provide a check in the amount of $1,800 or $2,000

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prior to beginning that drilling.

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Mr. Carney.

That check was sent to

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MR. CARNEY:

I have received no such check.

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THE COURT:

Well, has the check been negotiated?

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MR. WIAND:

It has not been negotiated, but we

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definitely -- we definitely sent it, and I've got --

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Mr. Rizzo is the one who did it, he can testify to you that

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he sent it.

At any rate, shortly after that is when we

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started -- when we first realized that they had a commercial

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interest and had found somebody that they wanted to work

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with to work this lease.
We've had no feedback or adverse interest from

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anybody other than these two gentlemen of all the

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leaseholders, and we have, you know, included reports that

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have been filed, and we've also had a claims -- a claims

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motion, and nobody made a claim in the claims motion.

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you know, we've been moving forward with doing -- with doing

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that and we believe that the activities that we were engaged

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in were significant to maintain the lease, and prior to --

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prior to beginning and leading up to this proceeding we

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hadn't heard otherwise from anybody.
THE COURT:

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He's mentioned some liabilities,

MR. WIAND:

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So,

Judge, with respect to oil properties

Mr. Wiand.

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and leases, and there are a lot of old wells out here, there

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are provisions with respect to -- from the Railroad

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Commission that there is obligations with respect to

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plugging of wells, and we are in compliance with the

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Railroad Commission's regulations on that.

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posted with respect to the plugging obligations.

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Railroad Commission visits these properties on a regular

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basis, knows exactly what we're doing and has raised no

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concerns with respect to that, and we have been meeting our

We have a bond
The

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plugging obligations as they are required, and anybody that

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we would bring in to continue this lease would also assume

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those obligations and continue with them.

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red herring.

It's a

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THE COURT:

How about the roads he's mentioned?

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MR. WIAND:

The roads -- this is a very large

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property.

We received some pictures that there were some

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tracks in a piece of a road.

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and our supervisor, Mr. Chad Gray, is here and can speak to

The individual who is on-site

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that.

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nature, but -- and there are also deer hunters, family

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members with four wheelers and folks of that nature out

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there on the roads.

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back, you know, with respect to us that we've done any

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significant damage to a road, and these are just a farm road

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out in the middle of wide open spaces and they picked a

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picture of one spot in a road.

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significant deterioration of any of those roads that relates

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to us.

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It might have been after a rain or something of that

There is nothing that can be traced

There has been no

There's also something in these papers that

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somehow that we have polluted some -- I've lost the name of

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the lake, but some lake, that there has been some spillage

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with respect to that.

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respect to any of those -- with respect to the oil industry,

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there's always a little bit of stuff that goes on, but we

Mr. Gray will testify to you with

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regularly clean that up, and with respect to this lake we

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supposedly polluted, it's 85 miles away from where any of

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our activities are, so it just didn't occur.

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THE COURT:

Yes, Mr. Carney.

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MR. CARNEY:

Your Honor, the waste tank that's

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attached to our pleadings is an illegal tank, it was

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improperly, grossly, negligently constructed, and when it

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rained it flushed out -- it flushed out down the hill, it

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went into the creek, the creek flows into Possum Kingdom

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Lake.

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hill, and there was heavy rains this year.

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illegal, all right?

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not lined.

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the very thing that happened.

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The watershed into the deep creek is right down the
But the tank is

It was not properly constructed.

It's

It doesn't have a two foot berm on it to prevent

The lease provides that they are obligated to

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prepare and maintain all-weather roads.

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obligation to not just not damage the roads but to make them

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all-weather roads, which means caliche, gravel, they're to

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surface the roads.

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additional damages under the lease.

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That's not been done.

THE COURT:

It's an affirmative

Those are

Well, how do we know it was done under

Mr. Wiand's tutelage and not the Downeys?
MR. CARNEY:

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I didn't understand.

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THE COURT:

How do we know -- I'm sorry, again?

The Downeys were Quest, right?

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MR. CARNEY:

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THE COURT:

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Yes, sir.
They executed this lease on behalf of

Quest, right?

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MR. CARNEY:

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THE COURT:

They acquired the lease, yes.
Okay.

How do we know that it wasn't

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their actions that damaged the roads with regard to this

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tank?

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MR. CARNEY:
to do this.

They've had three years, Your Honor,

This was done during the last three years.

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I took the pictures.

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THE COURT:

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He's the supervisor?

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MR. WIAND:

He is, Judge.

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THE COURT:

Bring him up.

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MR. WIAND:

Okay.

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THE COURT:

Madam Clerk, would you swear him.

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THE CLERK:

Yes, Your Honor.

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Please raise your right hand.

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Do you solemnly swear or affirm that the testimony

Well, let me hear -- Mr. Gray is what?

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you're about to give will be the truth, the whole truth and

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nothing but the truth, so help you God?

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THE WITNESS:

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THE CLERK:

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Yes, I do.
And please state for the record your

name and spell your first and last name.
THE WITNESS:

Michael C. Gray, M-I-C-H-A-E-L.

MICHAEL C. GRAY - DIRECT

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You said spell my last name or first name?

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THE CLERK:

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THE WITNESS:

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THE CLERK:

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Yes, please.
G-R-A-Y.

Sorry.

Thank you, sir.

You may have a seat

in the witness box.
THE COURT:

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All right.

Mr. Morello, go ahead.

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- - - - -

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DIRECT EXAMINATION MICHAEL C. GRAY

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BY MR. MORELLO:

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Q

Mr. Gray, could you please identify your connection and

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sort of your work duties with respect to Mr. Wiand on behalf

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of Quest.

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A

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on and I just kind of oversee the -- on the grounds,

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everyday basis of Quest for Mr. Wiand, for the receivership.

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Q

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regular course of your regular day on behalf of Quest, what

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kind of activities were you engaging in?

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A

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properties.

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It's just to check everything, all the producing wells,

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every day, gauge tanks, you know, clean up messes if we got

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a little mess or fix a flow -- fix things that are broken,

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little roustabout work, just maintenance and checking

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things.

I worked for Quest prior to the receivership and I stay

Okay.

And what were your specific job duties?

In the

Myself and another fellow, we just oversee the
We call it -- we pump.

We call it pumping.

MICHAEL C. GRAY - DIRECT

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Q

Is it fair to say that you were overseeing, you know,

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the operations of drawing oil or gas out of the wells on --

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A

Yes.

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Q

-- the Hatchett lease?

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A

Yes, sir.

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Q

And let's start with 2015.

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with the Hatchett lease?

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A

Yes, sir.

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Q

And the Hatchett land?

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A

Yes, sir.

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Q

Okay.

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activities you engaged in with respect to, you know, the

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property that's subject to the Hatchett lease.

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A

15

works the wells over, fixes things that -- they had been --

16

the wells were not producing before that, we went in there,

17

we pulled the tubing, fixed the tubing and put them back

18

into production to produce.

19

October of '15.

20

Q

That was in October, 2015?

21

A

Yes.

22

Q

And were you successful in making the wells produce

23

oil --

24

A

25

we did successfully get them to produce.

You're familiar obviously

Beginning in 2015, can you explain what kind of

We had a workover rig, which is a pulling unit that

I want to say that was in

We did get -- the number 1 well and the number 5 well,

MICHAEL C. GRAY - DIRECT

21

1

Q

And how long did oil flow from those wells after you

2

successfully got them to produce?

3

A

4

have an injection well that is on the property that we

5

dispose of our wastewater, you essentially collect the gas

6

and you collect the oil and the injection well is for

7

disposal of the wastewater, and when we injected -- we were

8

injecting into that and then we had a problem with the

9

injection well, so we had to shut down, go over and work on

We started producing them and after a few days -- we

10

the injection well.

11

Q

Okay.

12

A

It was -- that was in October, when we worked on it,

13

initially worked on the injection well, 2015.

14

Q

15

drawing any more oil out of any of these wells?

16

A

17

injection wells always flow back fluid when you work on

18

them, and usually they'll initially flow back oil and then

19

they'll turn to water, and as we -- as we were flowing it

20

back, we noticed it never -- never switched back to water,

21

so it obviously had a head built up on it, so we run a

22

flow line from the injection well to the oil tank and just

23

started flowing oil into the oil tank from the injection

24

well.

25

Q

Do you recall approximately when that happened?

And after October of 2015, were you successful in

While we were working on the injection well, it --

And how much oil was -- how long did that -- how long

MICHAEL C. GRAY - DIRECT

22

1

did the oil flow?

2

A

3

about 40 -- 40 or so barrels of oil into the tank.

4

Q

So this started roughly in October of 2015?

5

A

Yes, sir.

6

Q

So approximately when did it stop flowing?

7

A

In January, I believe, January of 2016.

8

Q

And after the flow stopped, did you do anything else

9

with respect to these existing wells?

It flowed for about four months real slow, but in total

10

A

We had to get another workover rig in February because

11

we had a problem with the tubing on the ejection well, so we

12

brought a rig back in February and we pulled it again and we

13

run a sub with a collar so the pipe wouldn't try to push

14

out, because we had pressure on the well, and after we put

15

it back together, I thought because we had pressure we might

16

be able to flow some more oil, so we put it back online and

17

tried to flow it back into the oil tank, and it -- overnight

18

it flowed about a half a barrel and it just -- it died out,

19

no more pressure.

20

Q

21

recall?

22

A

23

I believe.

24

Q

25

talking about, they fall under the definition of a workover

And what timeframe was that, that this occurred, do you

I believe that was in February.

I think mid February,

Is it fair to say that all these activities you've been

MICHAEL C. GRAY - DIRECT

23

1

of a well?

2

A

3

you've got a rig, it's a workover.

4

Q

5

recall what you and the receiver did next with respect to

6

the property covered by the Hatchett lease or these wells

7

specifically?

8

A

9

a well, and so we kind of started trying to put things

Well, I mean, yes, the rig that we have over there, if

And after the last episode in February, 2016, do you

Well, we had always discussed trying to possibly drill

10

together to figure out where we would like to drill a well.

11

We spoke with the geologist that had done some of the

12

studies out there and we got him to find the location.

13

We had surveyors come out, they surveyed and I believe

14

staked a spot to drill.

15

out of Albany, Texas that owns a drilling rig.

16

waiting list as far as to start drilling.

17

permit, I believe, in place, the drilling permit through the

18

Railroad Commission, and I had some other vendors lined out,

19

we were good to go, and then we had to stop.

20

Q

And do you know why you had to stop?

21

A

I just got a call from Burt's office that said,

22

you know, hold off on it, because there was some

23

interference with the landowners.

24

Q

25

allowing us to continue drilling?

I personally talked to Dean Lowe
I was on his

We had the

So your understanding was that the landowners were not

MICHAEL C. GRAY - DIRECT

MR. CARNEY:

1
2

24

Your Honor, this is calling for

hearsay.
THE COURT:

3

I'll overrule the objection.

4

BY MR. MORELLO:

5

Q

You can answer the question.

6

A

I was told from Burt's office not to come out there

7

until this was resolved.

8

Q

Okay.

THE COURT:

9

THE WITNESS:

10
11

And what was --

THE COURT:

13

THE WITNESS:

15

That was in I think July.

July or

August maybe.

12

14

When was that, Mr. Gray?

Let me ask you a question.
I'm sorry.

That's the best I can

recall.
THE COURT:

That's all right.

So July or August

16

of 2016 you receive instructions from the receiver to stop

17

whatever you're doing.

18

THE WITNESS:

It might have been -- it might have

19

been September.

20

I can't really remember, but I know -- yes, sir.

21
22

I think it might have been later, I'm --

THE COURT:

instructions from Mr. Wiand to stop doing what you're doing.

23

THE WITNESS:

24

THE COURT:

25

But in any event, you received

Yes.
And what is it that you were doing

that he told you to stop doing?

MICHAEL C. GRAY - DIRECT

1

THE WITNESS:

Oh.

25

Well, we had it lined out to

2

start drilling.

I did go out there, not on an everyday

3

basis, but every so often, maybe twice a month, three times

4

a month, and just over -- just kind of made a roundabout

5

look to make sure -- because everything was shut in, just to

6

make sure that there was no leaks or, you know, nothing

7

catastrophic was going on there, and so -- and then also we

8

had -- we had the drilling rig lined up to show up,

9

I believe it was going to show up within the next two weeks

10

to drill a well.

11

step onto the property.

12

I was told to just halt on that and not

THE COURT:

Okay.

So sometime in July, August,

13

September, you stopped all your activities and you quit

14

going on the property?

15

THE WITNESS:

16
17
18

than summer.

I believe it might -- it was --

THE COURT:

But in any event, after you got that

instruction --

19

THE WITNESS:

20

THE COURT:

21

THE WITNESS:

22

THE COURT:

23

It may have been later than then,

Yes, I did.
-- you quit going on the property?
Yes.
And no one connected with you went on

the property?

24

THE WITNESS:

25

THE COURT:

No, sir.
All right.

Go ahead.

MICHAEL C. GRAY - DIRECT

26

1

BY MR. MORELLO:

2

Q

3

longer go on the property, was there any Quest equipment

4

that had been left on the property?

5

A

Yes.

6

Q

Do you know the approximate value of the equipment that

7

was left behind on the Hatchett land?

8

A

9

range.

Did you -- at the time you were told that you could no

It's going to be in the 200,000 to 225,000 dollar
That's equipment that is associated with the lease.

10

I have a pipe trailer with some pipe on it that was left

11

there from when we worked on the last well that we worked

12

on, it's still on the location.

13

there, it's not there, but --

14

Q

15

property in the tank that was pumped during the time that

16

Quest had access to the land?

17

A

18

tank maybe.

19

Q

20

sort of terminated at some point when you were told to stop

21

entering the land sometime in the fall of 2016, and you

22

described them as working towards drilling a new well, when

23

did that -- when did that all sort of start being discussed

24

with the receiver, the implementation of that plan?

25

A

I've had to leave that

And how about was there any oil left behind on the

I believe there's a total of 70 barrels or so in the
I'd have to look.

Now, the activities that you were just describing that

Well, we had discussed drilling a well from day one of

MICHAEL C. GRAY - DIRECT

27

1

the receiver, I mean, on the Hatchett, because we had --

2

that was kind of the plan and that's what -- the

3

information -- some of the information was already there on

4

drilling the well.

5

trying to figure out what we wanted to do as far as drilling

6

a well.

7

Q

8

leave the land idle at any point?

I mean, we had always discussed it,

Did you ever believe the receiver intended to at all

MR. CARNEY:

9

THE COURT:

10

Objection, Your Honor.

Speculation.

I'll overrule the question.

11

A

Repeat the question.

I'm sorry.

12

Q

I was asking if you believe the receiver at any point

13

intended to leave the land idle and not do anything with it.

14

A

No.

15

Q

I think earlier we were talking about some of -- some

16

allegations relating to pollution, and I think there was a

17

discussion about a waste tank that Mr. Carney, I believe,

18

said was not in compliance.

19

A

20

pits.

21

covered, bermed completely.

22

for workovers, you do not have to have them lined, you do

23

not have to have them bermed.

24

It's not an illegal pit, not according to the Railroad

25

Commission, and that's who -- I go by their rules, Railroad

Not intended to, no.

The waste tank is -- if it's a -- we call them workover
A drilling workover pit requires you to be plastic
A workover -- a workover pit

That was a workover pit.

MICHAEL C. GRAY - DIRECT

28

1

Commission rules.

It's not an illegal workover pit.

2

Q

3

the Hatchett land, approximately how many pits were there

4

that had been made by you or anyone else on behalf of Quest?

5

A

6

that's left on there.

7

Q

Had there been more pits earlier in time?

8

A

Oh, I'm sure there's been pits at every location on the

9

place over the years, several.

And at the time that you were told no longer to enter

I believe there's a partial one, one and that's it,

10

Q

Okay.

Well, did you personally create any pits?

11

A

Personally, I've created pits, yes.

12

Q

Okay.

13

A

We sucked them out and then -- had them sucked out and

14

buried them, just remediated them.

15

Q

Did you ever leave any oil or waste or anything else --

16

A

No.

17

Q

-- in those pits?

18

A

No.

19

Q

And you said you covered those pits?

20

A

Yes.

21

Q

And so at the time -- again, I believe you testified

22

before, but just so I'm clear, at the time you were told to

23

no longer enter the land in the fall of '16, how many pits,

24

open pits, do you believe still existed?

25

A

What did you do with those pits?

I believe there was a partial one.

MICHAEL C. GRAY - DIRECT

29

1

Q

With respect to the roads, what was the condition of

2

the roads at the time that you were told to no longer enter

3

the Hatchett land?

4

A

5

of the roads are just dirt, and if it rains you can sink

6

that deep (indicating).

7

under good but not poor.

8

Q

Who else used those roads?

9

A

I'm sure anybody associated with the ranch used the

Some of the roads are gravel, harder gravel roads, some

I mean, I would say overall they're

10

roads.

There's deer hunters that would use the roads.

11

I mean, of course, the oil people would use the roads, but

12

the family members, there's -- I don't -- I'm thinking

13

there's four or five, I don't know how many exactly of

14

landowners that own different properties on the ranch

15

itself, and each landowner has, you know, cattle people that

16

will be there, deer hunters that will be there, I don't know

17

exactly how many, but there's more than just the oil people.

18

Q

19

activity that was being done on behalf of Quest?

20

A

Yes.

21

Q

I think there were allegations of contamination.

22

Are you familiar with any allegation -- with any actual

23

contamination that had happened because of any of the

24

operations that you were engaged in on behalf of Quest?

25

A

So there's other activity on the land besides the

There was -- if there was a contamination that had

MICHAEL C. GRAY - DIRECT

30

1

gotten into Possum Kingdom Lake, I mean, I probably would

2

not even be here, I would probably be in jail, or somebody

3

would.

4

The EPA would not -- I mean, that's just -- that's a no-no.

5

It would have been on every news -- they would have shut

6

every road down in the way.

7

source, so I don't know how we determine -- how anybody

8

determined that pollution got in a lake 80 miles away.

9

Q

That lake was 80 miles away, you said?

10

A

Right about it.

11

Q

During the time that you were operating on behalf of

12

Quest, did the Railroad Commission ever indicate to Quest or

13

to you that there was any spillage or contamination issues?

14

A

15

Railroad Commission as far as contaminants.

16

received a letter from them or any other -- any other way.

17

Q

18

monitoring the Hatchett property or any other oil property?

19

A

20

property regularly.

21

even shut-in leases to producing leases, they have a

22

schedule that they routinely go around and they do

23

monitoring.

24

Q

25

had found any problems with any of the wells that are

That's not going to happen.

I mean, it can't.

I mean, that's a major water

No, as far as I know we're not in any violation with
I have not

Do you know whether the Railroad Commission would be

I don't know how often, but they do monitor every oil
They come by and do inspections of --

And is it your understanding if the Railroad Commission

MICHAEL C. GRAY - DIRECT/CROSS

31

1

controlled by Quest, Quest or the receiver would have been

2

alerted?

3

A

4

it was in the time that we're here and it takes to get a

5

letter here, you know, a week or so, but --

6

Q

7

that you were instructed to no longer enter the land, is it

8

your understanding whether Quest or the receiver were in

9

violation of any of their plugging obligations?

They have not or we would have been notified.

Unless

With respect to the plugging of any wells, at the time

10

A

Plugging obligations, no, we're not in violation.

11

We're up to -- to all of the standards on that.
MR. MORELLO:

12
13

I don't have any other questions,

Your Honor.

14

THE COURT:

Mr. Hatchett?

15

MR. HATCHETT:

Thank you, Your Honor.

16

- - - - -

17

CROSS-EXAMINATION OF MICHAEL C. GRAY

18

BY MR. HATCHETT:

19

Q

20

lease?

21

A

Yes, sir.

22

Q

And you've been out there for a good while?

23

A

Yes, sir.

24

Q

You're aware of a lot of the things that go on?

25

A

Yes, sir.

Chad, you're the pumper out there on the Hatchett

MICHAEL C. GRAY - CROSS

32

1

Q

Prior to your working with the receiver, you worked for

2

Quest?

3

A

Yes, sir.

4

Q

That was the Downeys?

5

A

Yes, sir.

6

Q

And you pumped the wells?

7

A

Yes, sir.

8

Q

Have many of those wells were shut in?

9

A

How many of the wells were shut in when --

10

Q

How many total wells are on the Hatchett lease?

11

A

There are, I believe, 11 total holes.

12

Q

11 well bores?

13

A

Well bores, yes.

14

Q

Of those well bores, how many of them are active?

15

A

Today?

16

Q

Today.

17

A

Zero.

18

Q

None of them?

19

A

Uh-uh.

20

Q

Okay.

21

were active?

22

A

23

prior to receivership?

24

Q

25

took over the lease.

And when Quest had the lease, how many wells

We activated the -- when Quest -- are you talking about

I'm talking about prior to the receivership, when Quest

MICHAEL C. GRAY - CROSS

33

1

A

We had, I believe, the one well, the number 5 well, the

2

A-2 well, the -- I'm trying to count them in my head so I'll

3

get you a total count.

4

So I think we activated four wells during the Downeys'

5

version of Quest or whatever --

6

Q

7

had four wells?

8

A

We did operate the lease with four wells, yes.

9

Q

And at some point when the receiver took over those

The -- I believe the S-3 well.

So when Quest was actually operating the lease, they

10

wells were shut in?

11

A

12

not long, but they shut in during the Downey era.

13

Q

14

shut in was in 2013, that was after the receiver?

15

A

I'm -- I don't know.

16

Q

At the present time are there -- prior to the -- let me

17

just go back.

18

A

Okay.

19

Q

Prior to that, were there any wells that were in

20

production?

21

A

22

of the lease until our injection well did go down.

23

Q

And how much oil did you sell off that?

24

A

Well, we didn't sell -- you have to have a whole -- you

25

have to have a total load before you can sell.

No, they shut in long before the receivership.

Okay.

I mean,

But there was one well, the last well that was

The lease expired April the 15th, 2016.

We did produce the 1 and the 5 prior to the expiration

You can't

MICHAEL C. GRAY - CROSS

34

1

sell oil partly, so --

2

Q

Was it in paying quantities?

3

A

I'm sorry?

4

Q

Was the production in paying quantities?

5

A

Well --

6

Q

I believe you said that one of the wells flowed back a

7

half barrel.

8

A

9

40 barrels too.

Well, that was the same one that flowed back the
That was the same well.

10

Q

Okay.

But that was an ejection well.

11

A

Yes.

12

Q

That's not a production well.

13

A

It's -- yes.

14

Q

And it doesn't have a P4 production license, it's an

15

injection well, right?

16

A

Yes.

17

Q

According to the Railroad Commission, you can't count

18

that as production --

19

A

It's recoverable.

20

Q

-- is that correct?

21

A

It's recoverable.

22

production or not.

23

Q

24

not production.

25

A

I don't know if you can count it as

I have no idea.

Well, it didn't come from a production well, so it's

Okay.

I don't know how the Railroad -- I don't know.

MICHAEL C. GRAY - CROSS

35

1

Q

After the receiver took place, was there any oil or gas

2

sold off the Hatchett lease?

3

A

Before or after?

4

Q

After the receiver took over, was there any oil or gas

5

sold --

6

A

7

receivership took over.

8

Q

And that was produced during the Quest time?

9

A

Yes.

10

Q

Those tanks were filled when the Downeys had it?

11

A

Yes.

12

Q

So that production took place before the receivership

13

took place?

14

A

Yes.

15

Q

When the receiver was in control, was there any oil and

16

gas produced off the Hatchett?

17

A

I mean --

18

Q

You're the pumper.

19

didn't.

20

A

21

I don't know the law, if I can call it produced or not.

22

I don't know how that goes.

23

part.

24

Q

25

you have the oil --

Yes.

Yes, there was 170 barrels, I believe, sold after

Either you produced some or you

Not from anywhere other than the injection well.

I'm not familiar with that

Well, I asked if it was sold.

You're the pumper.

Did

MICHAEL C. GRAY - CROSS

36

1

A

It was not sold.

2

Q

Did the oil gatherers come get the oil?

3

A

No, we did not sell any.

4

Q

Okay.

5

didn't gather any oil or gas?

6

A

No.

7

Q

Okay.

8

time that the receiver had the lease; is that correct?

9

A

And so the gas production, the gas gatherer

So there was absolutely no production during the

There was no production out of a producing well.

There

10

was produc -- I mean, I don't know how to --

11

Q

No production sold.

12

A

Not sold.

13

Q

Okay.

14

A

Wells shut in.

15

Q

Okay.

16

A

Um-hum.

17

Q

And without production, what could possibly perpetuate

18

the lease beyond the primary term?

19

A

I mean, I don't know.

20

Q

Would it be drilling activity?

21

A

Drilling activity would, yes.

22

Q

Right.

There was no production sold?

And the wells were shut in?

Now the lease has expired.

Now, I understand that ya'll plan --

23

MR. MORELLO:

24

THE COURT:

25

MR. MORELLO:

Objection.
Sir?
I'm not sure -- he hasn't

MICHAEL C. GRAY - CROSS

37

1

established that Mr. Gray knows the terms of the lease and

2

what would actually constitute satisfaction of the clause

3

that extends the term of the lease.
THE COURT:

4
5

the lease?
THE WITNESS:

6
7

No, I'm not, sir.

I have no

dealings with the actual lease itself.
THE COURT:

8
9

Do you know -- are you familiar with

Mr. Hatchett.

I think the objection is well-taken,

Plus that's an issue for me to decide.

10

BY MR. HATCHETT:

11

Q

12

would call the crude buyers?

13

A

Yes.

14

Q

And did you call the crude buyers to come pick up

15

oil --

16

A

No.

17

Q

-- during the time of the receivers?

18

A

During the time of the receivers, yes, I did.

19

sold 176 barrels during the time of the receiver.

20

Q

Now, the 176 barrels --

21

A

One hundred seventy something.

22

Q

-- you're talking about was produced during the time of

23

the Downeys?

24

A

Yes.

25

Q

Yes.

Okay.

As the pumper, aren't you in control of when you

Yes, we

MICHAEL C. GRAY - CROSS

38

1

A

But I did call them during the receivership era.

2

Q

Okay.

3

A

Yeah.

4

Q

So during the receivership era you called and had that

5

crude oil picked up?

6

A

Yes, I did.

7

Q

But it was not produced during the time of the

8

receivership?

9

A

That is correct.

10

Q

Okay.

11

A

Yes.

12

Q

Okay.

13

well?

14

A

Yes.

15

Q

And they applied for a drilling permit?

16

A

Yes.

17

Q

Did they ever stake a location?

18

A

Yes.

19

Q

Did they build the pits?

20

A

No.

21

to get on location.

22

Q

23

the 26th, 2016 for the permit?

24

A

25

did.

So you do know about that information?

Now, you said that they had planned to drill a

We -- we got shut down right prior to being able

So you did this -- you made your application September

I'm not sure.

I didn't file for the permit, the office

MICHAEL C. GRAY - CROSS

39

1

Q

If it was done on September the 26th, 2016, it would be

2

five months after the expiration of the lease; is that

3

correct?

4

A

Yes, it would be.

5

Q

And would you agree that you got notice from, I guess,

6

Mr. Wiand that a letter had been sent October the 16th,

7

2016?

8

A

9

been sent, no.

I don't think I had been informed that a letter had

10

Q

But you were informed not to come back on the lease?

11

A

This was after we filed for the permit and after all of

12

that.

13

I wasn't -- I wasn't aware of all the details of why.

14

Q

15

either you produce a well or you plug it?

16

way it is?

17

A

18

necessarily.

19

probably in the state of Texas than there are producing

20

wells.

21

Q

22

that you have to plug the well; you're aware of that?

23

A

24

paperwork for a 14(B) extension or something like that,

25

which --

Yes.

I mean, I was informed not to come back, but

Now, isn't it true in the oil and gas industry that

You produce a well or you plug it?

Isn't that the

I mean, no, not

I mean, there's a lot more unplugged wells

So if you're not going to produce a well, the rule is

You have to plug it if you don't have the proper

MICHAEL C. GRAY - CROSS

That's correct.

40

1

Q

And if you don't have that extension,

2

you need to plug the well within 30 days?

3

A

Yep.

4

Q

If you have the extension, then you can extend it for a

5

year?

6

A

7

can have X amount of wells on your 14(B) extension and you

8

either have to plug a percentage of what's on your extension

9

a year or put back into production a percentage, and we're

I believe so.

Yes, the 14(B) extension rule is, I believe, that you

10

in compliance with our 14(B) extension, to my notice.

11

Q

12

permit was applied for to extend the plugging of the wells;

13

is that correct?

14

A

I have no idea.

15

Q

You don't know?

16

A

No.

17

Q

You don't know if Mr. Wiand filed any kind of extension

18

to plugs wells with the Railroad Commission?

19

A

No, I don't know.

20

Q

Yes.

21

A

Okay.

22

Q

But isn't it also true you have to have a valid lease

23

in order to get an extension?

24

A

25

field guy.

Well, I understand that a drilling and a plugging

I don't know about that.

On the Hatchett?

I don't know.

I have no idea.

No.

I don't know how -- I'm more of a

As far as paperwork goes, I know a little bit

MICHAEL C. GRAY - CROSS

41

1

but not a whole lot.

I don't know.

2

Q

3

passed?

4

A

I do agree with that.

5

Q

And the lease was to be expired on that date?

6

A

I -- yes.

7

to that, but, yes, that's my belief, that it was prior --

8

Q

9

shut in and there's no production?

But you do agree that April the 15th, 2016 has come and

I've never, I mean, seen it in writing prior

Your testimony to the Court now is all those wells are

10

A

Yes, sir.

Yes, there is none.

11

Q

Now, as to the damages we're talking about, there was a

12

dirt pit on the well, you're aware of that?

13

A

Yes.

14

Q

And it had oil in it?

15

A

I didn't see the oil -- I don't know when the pictures

16

were taken.

17

Q

18

If there's oil in that pit in those pictures, where did the

19

oil go?

20

A

21

we had it remediated, we had it sucked out.

22

there was all saltwater probably when we did a workover and

23

there would have been a skim of oil.

24

out.

25

been rainwater.

I haven't seen oil in it, no.

Well, I've just got to ask, where did the oil go?

I've never seen oil in it.

The oil we had in the pit,
There was --

We sucked everything

Any water that was in the pit after that would have
I mean --

MICHAEL C. GRAY - CROSS

Well, that's the point.

42

1

Q

2

and it filled the pit up and ran over the dike, and that's

3

what ran into Deep Creek, and Deep Creek is on the watershed

4

of Possum Kingdom.

5

A

6

I mean, whatever was in there would have had to have been

7

rainwater, that I'm aware of.

8

I mean, I would have known if there was a pollution issue.

But there was no oil in the pit before the rain.

MR. HATCHETT:

9
10

The oil -- the rainwater came

I would feel like I --

Your Honor, may I approach the

witness?
THE COURT:

11

You may, sir.

12

BY MR. HATCHETT:

13

Q

I have in my hand what was marked as Exhibit 1.

14

A

Yes.

15

Q

Do you recognize that?

16

A

I don't know when it was -- I'm pretty sure this is

17

probably the 9-Q.

18

I mean, we did do workover -- the receivership did do a

19

workover on this well after the fact.

20

pit.

21

back, but --

22

Q

Is that oil in the pit?

23

A

I don't know.

24

could be carbon sulfide or it could be -- I mean, I don't

25

know.

I have no idea when it was taken.

That's a workover

We flowed -- when we did swabbing on it, we did flow

I mean, I don't know what it is.

It

MICHAEL C. GRAY - CROSS

43

1

Q

So you're saying you don't think that's oil?

2

A

It could be.

3

picture.

4

I -- but I don't know when that -- was that picture taken

5

during a workover?

6

was oil in the pit at one time.

7

Q

Now, we were talking about the roads.

8

A

Yes, sir.

9

Q

And you may not know what the provisions of the lease

It could be.

It's hard to tell in a

I mean, it could be oil, it could be -- I mean,

I don't know.

I mean, I told you, there

10

are, but --

11

A

I do not know.

12

Q

-- oil and gas leases normally provide that the

13

operator maintain the roads.

14

A

Okay.

15

Q

Is that correct?

16

A

Um-hum.

17

Q

And so the production zones in nearly all these other

18

wells have already had good caliche roads all the way to the

19

roads.

20

A

Um-hum.

21

Q

But that particular well didn't have an all-weather

22

road.

Yes, sir.

23

MR. MORELLO:

24

THE COURT:

25

What's the basis?

Objection, Your Honor.
Can't read your mind, Mr. Morello.

MICHAEL C. GRAY - CROSS

MR. MORELLO:

1
2

THE COURT:

Just ask the question, please,

Mr. Hatchett.
MR. HATCHETT:

5
6

I'm not sure who is testifying here,

if it's Mr. Hatchett or Mr. Gray.

3
4

44

I'm trying to get him to understand

where we are in regard to the lease.
THE WITNESS:

7
8

BY MR. HATCHETT:

9

Q

Yes, sir.

Were there all-weather roads to this well that we see

10

here?

11

A

12

is not an all-weather road, no, it's just a pasture road,

13

yes.

14

Q

15

to maintain an all-weather road?

16

A

Yes.

17

Q

Not the responsibility --

And that would be the responsibility of the operator,

Yes.

MR. MORELLO:

18
19

If that is the 9-Q, if that's what well that is, there

Q

Objection, Your Honor.

-- of the farmers or the ranchers or the deer hunters?

20

THE COURT:

21

MR. MORELLO:

What's the matter, Mr. Morello?
Again, he's testifying himself as

22

opposed to asking Mr. Gray -- Mr. Gray already testified he

23

didn't know whose responsibility it is to maintain the roads

24

under the lease.

25

now he's asking him --

Mr. Hatchett fed him that information and

MICHAEL C. GRAY - CROSS

THE COURT:

1

45

Well, do you know whose responsibility

2

it is to take care of the roads?

3

THE WITNESS:

I don't know what the responsibility

4

is on the existing roads.

5

existing pasture road.

6

THE COURT:

7

THE WITNESS:

If that -- that road was an

How bad is the road anyway?
I mean, it's -- it's just a dirt

8

lane in between mesquite trees.

9

at all, no, sir.

10

THE COURT:

11

THE WITNESS:

12

There's no material on it

Can you travel it?
You can travel it in a pickup truck,

yes, sir.
THE COURT:

13

All right.

14

BY MR. HATCHETT:

15

Q

Is it an all-weather road?

16

A

No, it's not an all-weather road.

17

Q

So if we had a bad rain, you couldn't travel it?

18

A

Probably not.

19

MR. HATCHETT:

I have nothing further, Your Honor.

20

THE COURT:

21

MR. CARNEY:

22

May I approach?

23

THE COURT:

24

Who took it and when?

25

MR. CARNEY:

Mr. Carney, do you have any questions?
Yes, Your Honor, a few.

Yes.

Your Honor, I took it in the summer

MICHAEL C. GRAY - CROSS

1

46

of 2016.

2

THE COURT:

When?

3

MR. HATCHETT:

4

THE COURT:

June or July.

All right.

5

- - - - -

6

CROSS-EXAMINATION OF MICHAEL C. GRAY

7

BY MR. CARNEY:

8

Q

9

that well?

When was the last time you pumped out the waste tank on

10

A

In 2016, earlier probably.

I don't -- I'd have to look

11

back.

12

Q

13

told to not go onto the Hatchett ranch property?

14

A

Before October 14th of '15?

15

Q

Of 2016.

16

A

Of '16?

17

Q

And do you know what triggered the instructions you

18

received from the receiver or the attorney to not go on the

19

road or not to go on the property?

20

A

I think it was a dispute with the lease, I guess.

21

Q

What activity occurred on the Hatchett ranch leases

22

between April 15th and October 14th, 2016?

23

A

Between -- okay.

24

Q

Between April 14th, 2016, when the lease expired, the

25

primary term --

I really don't know.
Was there ever a time before October 14th that you were

No.

No, there wasn't.

I --

Give me the dates again.

MICHAEL C. GRAY - CROSS

47

1

A

Um-hum.

2

Q

-- and the notice for you to vacate the property on or

3

after October 14th, 2016.

4

A

5

I mean, that's basically -- pretty much, yeah, basically --

6

Q

Did you spud a well?

7

A

The location had been set.

8

out and they staked it.

Just trying to put together -- to drill a well.

MR. CARNEY:

9

We had the surveyors come

I object as nonresponsive.

10

Q

What is the definition of spudding?

11

A

Oh.

12

Q

Yes, sir.

13

A

I thought you said did we spot the well.

14

Q

Did you spud the well?

15

A

No, we did not spud the well.

16

Q

All right.

17

September of 2016, was it?

18

A

Probably.

19

Q

And the extension that you contend relieves you of a

20

plugging obligation wasn't filed until the fall of 2016, was

21

it?

22

A

23

Today was the first day I've heard that, plugging extension.

24

Q

25

extension for plugging you have to file a valid -- you have

Did we spud?

No.

The well application wasn't submitted until

That's probably right.

I don't know.

I have no recollection of the plugging extension.

And do you know whether or not in order to get an

MICHAEL C. GRAY - CROSS

48

1

to represent to the Railroad Commission that you have a

2

valid lease?

3

A

4

question I answered to him.

5

Q

So when did the well get staked?

6

A

I want to -- I really don't know.

7

the -- I know it was staked in two thousand -- late 2016,

8

I believe.

9

Q

The fall?

10

A

Probably, yeah.

11

I'm not sure.

12

Q

13

equipment within 120 days of the end of the lease term of

14

April 15th, did you do that?

15

A

We removed no equipment after the lease expired.

16

Q

Were the pits fenced, or was the pit fenced?

17

A

No.

18

Q

Was it bermed?

19

A

Partially.

20

Q

Would you look at the picture again, please.

21

A

I believe that's the berm here, coming back on the

22

back side, and there's a little bit of a berm over here, but

23

that's partially -- it's not bermed in the front.

24

Q

Is there a two foot berm?

25

A

No.

I don't -- I don't know.

I think that's the same
I'm not sure.

I'd have to look at

The fall of '16?
I'd have to look.

I don't know.

If the lease provided that you were to remove your

Not all the way around, no, sir.

MICHAEL C. GRAY - CROSS

49

1

Q

Just so we're clear on the extent of the activity,

2

you've testified as to every action that was taken after

3

April 15th to extend the lease, correct?

4

else --

5

A

6

I've stated everything that was -- that was done after --

7

Q

8

lease after April 15th?

9

A

Is there anything

Well, I don't know if it was to extend -- I'm just --

You stated every activity that was done on the Hatchett

Yes, I believe, other than paperwork issues and ongoing

10

things like that, but, yes.

11

Q

12

have or could have taken before October 15th, 2016?

13

A

Not before -- not interfered with -- in the field, no.

14

No.

No.

15

Q

Let me show you what's been marked as Exhibit 2.

16

you familiar with that information?

17

A

Yes.

18

Q

And does it list the status of the active or

19

non-active?

20

A

21

you know, where does it show the status at?

Did anybody interfere with any actions that you would

Are

These are the list of the wells.

Status -- somewhere you may show me where it says --

Okay.

22

Shut-in date, it gives the date they were

23

shut in, so I'm assuming they're shut in, is what their

24

status is.

25

Q

Is that consistent with your testimony that all the

MICHAEL C. GRAY - CROSS

50

1

wells are shut in?

2

A

Yes.

3

Q

After April 15th, you've testified that there was one

4

well permitted and staked sometime in the fall of 2016.

5

A

6

100 percent when it was staked, but, yes.

7

Q

Where was that well located?

8

A

It was going to be the east side -- I mean, I don't

9

know how -- it's going to be due northeast of

I believe that's when it was staked.

I'm not

10

Bill Hatchett's house.

11

else understands where that's at, but pretty close to the --

12

to the --

13

Q

Tank battery?

14

A

No.

15

We're going to go northeast of Bill's house, maybe a mile or

16

so, I believe.

17

Q

18

activity on any other part of the ranch, correct?

19

A

What time period are we talking?

20

Q

We're talking about after April 15th, 2016.

21

A

No.

22

Q

Prior to April 15th, you testified there was only

23

activity as to, what, three wells, two production and an

24

injection well?

25

A

No.

No.

I mean, I don't know that -- nobody

To the power line that runs through.

And other than that particular location, there was no

No.

Yes, sir.

MICHAEL C. GRAY - CROSS

51

1

Q

So all the other wells --

2

A

Four wells.

3

That's where I believe this is.

4

I can't -- that's the only place I know we had a partial pit

5

there, and I believe it's here, it was extended, but we did

6

do work on this well also.

7

Q

8

workover pit on the brownfield well?

9

A

Does it -- I'm sorry?

10

Q

Is it an accurate depiction -- is the picture accurate?

11

A

I mean, it looks pretty close, I mean, yeah.

12

Q

Do you recognize it?

13

A

I believe I do.

The 9-Q, we did -- we did work on it.
I believe that's the 9-Q.

Does the photograph fairly and accurately reflect the

14

MR. CARNEY:

15

THE COURT:

16

Yes, sir.
Move to admit Exhibit 1, Your Honor.

MR. MORELLO:

Mr. Morello?
I don't think there's -- I don't

17

think there's been sufficient foundation established for the

18

accuracy of the picture, but, I mean, I don't have any

19

objection to it being --

20

THE COURT:

21

All right.

MR. CARNEY:

It will be received.

Thank you, Your Honor.

22

BY MR. CARNEY:

23

Q

You've driven to the brownfield well, haven't you?

24

A

To the which well?

25

Q

Well, the pit -- the waste pit well.

MICHAEL C. GRAY - CROSS/REDIRECT

This -- the well, if it is 9-Q, yes.

52

1

A

I didn't know

2

where this road went.

3

Is that what you're saying?

4

Q

I'm asking you do you recognize that road.

5

A

I do not, but -- I mean, it just looks like a pasture

6

road.

7

this road is or not, but if you say this goes to that well,

8

I guess it does.

9

Q

Is that where this road goes?

I do not know -- I couldn't tell you if that's what

We'll come back to that.
Exhibit 2, do you have any reason to dispute the

10
11

accuracy of the shut-in dates on Exhibit 2?

12

A

13

they are.

14

Q

Thank you.

15

A

I'm not sure.

I don't.

I don't know -- I don't know how accurate

I mean, I don't know.

I'd have to --

16

MR. CARNEY:

17

THE COURT:

18

MR. MORELLO:

Nothing further, Your Honor.
Do you have any redirect, Mr. Morello?
I do, Your Honor.

19

- - - - -

20

REDIRECT EXAMINATION OF MICHAEL C. GRAY

21

BY MR. MORELLO:

22

Q

23

the permit application for the new well, roughly in the fall

24

of 2016.

25

A

Mr. Gray, you were asked questions about the date of

Yeah.

MICHAEL C. GRAY - REDIRECT

53

1

Q

Would there have been activities that would have taken

2

place before that permit application was filed?

3

A

Would there have been activities before it was filed?

4

Q

So the -- yes.

5

A

Planning, and we did talk with the geologist and went

6

over the maps, went over what -- he had done some geology on

7

it, we went over that, I mean, just in preparation for

8

drilling a well.

9

Q

So before September -- let's assume September, 2016 is

10

the accurate date for the permit application filing.

Before

11

that application was there a survey done, would there have

12

been a survey done of the land?

13

A

They did do --

14

MR. CARNEY:

15

THE COURT:

Objection.

Foundation.

I'll overrule the objection.

16

A

They did do a survey, yes.

A survey company surveyed

17

to find the location in adjacent to where it was on the map

18

in order to find it in real life to know where we're going

19

to drill, yes.

20

Q

21

generated before September 16, 2016?

22

A

23

Hatchett, yes, and it has reference to the well we were

24

going to drill, it was in relation to that, yes.

25

Q

Do you know if the receiver had a geological report

There was a geologic report done on part of the

And do you know if drillers had been contacted before

MICHAEL C. GRAY - REDIRECT

54

1

the application was filed in September, 2016?

2

A

I did.

3

Q

Can you think of any other activities that took place

4

before, relating to the same new well that would be drilled,

5

that the permit was applied -- that the permit was applied

6

for in September, 2016?

7

A

No.

8

Q

Besides yourself, do you know if there are any other

9

individuals that work with the receiver on Quest?

I contacted a driller out of Albany, Texas.

10

A

Are there any other individuals that work with the

11

receiver --

12

Q

With respect to the Quest operations, besides yourself.

13

A

On the field?

14

Q

No, just in general.

In the field?

Let me ask it this way.

15

Do you interact -- who do

16

you interact with on behalf of the receiver with respect to

17

the Quest operations?

18

A

Roger Jernigan.

19

Q

And have you ever interacted with Jeffrey Rizzo?

20

A

Yes.

21

Q

And are you aware of everything they do with respect to

22

Quest?

23

A

No, not everything.

24

Q

So they could have been taking additional steps as well

25

behind the scenes --

They do a whole lot that --

MICHAEL C. GRAY - REDIRECT

55

1

A

Definitely.

2

Q

-- with respect to the new well drilling, correct?

3

A

Yes.

4

we had to get a Water Board letter.

5

file for the permit we had to get a Water Board letter, we

6

had to get -- I believe there was some more paperwork.

7

Everything has to be in line before you can even file for a

8

permit.

9

Q

Roger had to contact the Water Board Commission,
Before we could even

One last area I want to ask you.

Mr. Carney I think

10

raised the question about the pit being bermed and asking if

11

there was a two foot berm on one of the exhibits that he

12

showed you.

13

were dug and that were used were in compliance with all

14

regulations with regards to those pits?

15

A

16

be bermed, they don't have to be plastic, only drilling pits

17

have to be plastic, and some drilling pits don't even have

18

to be plastic.

19

Q

20

until you were told to stop, that you could no longer enter

21

the Hatchett lands, would you agree that the receiver was

22

actively engaged in attempting to drill a new well on the

23

Hatchett land?

24

A

25

Yes.

Is it your understanding that the pits that

When you dig a workover pit, they don't have to

Would you agree, Mr. Gray, that from April 2016 forward

Yes.

Yes.
MR. MORELLO:

I have no other questions,

MICHAEL C. GRAY - RECROSS

1

56

Your Honor.

2

THE COURT:

3

Any other witnesses, Mr. Morello?

4

MR. MORELLO:

5

THE COURT:

6

MR. HATCHETT:

7

10

No, Your Honor.
Mr. Hatchett?
I have no witnesses, but I would

like to recross Mr. Gray.
THE COURT:

8
9

Thank you, Mr. Gray.

cross and redirect.

Well, in my courtroom it's direct,
What areas do you want to inquire,

Mr. Hatchett?
MR. HATCHETT:

11

Your Honor, I wanted to inquire

12

that when the saltwater injection well had its problem, what

13

actually took place in getting that under control.
THE COURT:

14
15

Can you answer that question,

Mr. Gray?

16

THE WITNESS:

17

THE COURT:

18

Ask the question, Mr. Hatchett.

19

I'm sorry?
Have a seat again.
I'll allow you

some leeway.

20

MR. HATCHETT:

Thank you, Your Honor.

21

- - - - -

22

RECROSS-EXAMINATION

23

BY MR. HATCHETT:

24

Q

25

saltwater blowing out of the wellhead?

When the saltwater injection well had the problem, was

MICHAEL C. GRAY - RECROSS

1

A

No.

2

your protection, not the head.

3

Q

4

bradenhead, saltwater?

5

A

6

Yes.

7

Q

8

you got the call to come get it?

9

A

57

Okay.

We had -- it come out the bradenhead, which is

The bradenhead.

Did it come out of the

Yeah, it was coming out of the valve of the bradenhead.

And do you know how long it had been doing that before

No, I don't -- when I kicked the well on, it started

10

doing it the day I was there.

I always go by and I kick the

11

well, the pumps on, to make sure that everything is going to

12

come on manually, because it's all an automatic system.

13

There was no -- nothing coming out of the bradenhead before

14

that, because there would have been a puddle.

15

well on, on manual, and while I was at the lease, we was

16

working -- working over stuff, we were fixing flow lines and

17

stuff, and while I was there is when it started coming out

18

of the bradenhead.

19

Q

20

Janece that saltwater was blowing out of that head?

21

A

22

tubing had shot -- it had lifted out, that's when we got the

23

rig in February, but there was nothing coming out of the

24

well, no.

25

went over there and pulled it back down.

I kicked the

So you didn't receive a phone call from my sister

No, I did not.

I received a call from Janece that the

The tubing had lifted out from the pressure.

We

MICHAEL C. GRAY - RECROSS

58

1

Q

But it did flow back saltwater onto the surface?

2

A

No.

3

Q

It didn't come out of the bradenhead?

4

A

No, not that I recall.

5

there could have been a cupful maybe that was in -- in and

6

around the bradenhead when we worked over -- or when it --

7

when the tubing come out and the fluid might have came

8

around the packing rubber or something.

9

Q

Right.

10

A

Yes, there could be, yes, but it was a very small

11

amount that I cleaned up as soon as she called me.

12

Q

13

saltwater didn't spray up?

14

A

15

probably three foot, and it was just -- it was not standing,

16

it was just in --

17

Q

18

bradenhead, to come out of the wellhead?

19

A

There was pressure.

20

Q

Pressure?

21

A

Yes.

22

Q

And was it -- was it -- why didn't it just stay in

23

place?

24

A

25

we didn't pull a full stream back in until it was -- it was

No.

We -- it did not flow.

I mean, there could have --

When people came out and the packing head was loose,

It didn't -- it was contained within an area of

What would cause the tubing to come out of the

Was there some kind of problem with it?

When we worked over the well, we started pulling back,

MICHAEL C. GRAY - RECROSS

59

1

a light stream.

2

Q

Okay.

3

A

I didn't want a full heavy stream in the hole, so it

4

was a light stream, just because, being efficient-wise, we

5

were going to flow back anyway, there was no sense in

6

running a full stream back in.

7

Q

8

is problematic, causing problems?

9

A

So what did -- what property --

So that saltwater well -- that saltwater injection well

No.

It was that time -- I put a perforated -- I mean,

10

I put a sub in above the top joint now and then rested it

11

against it so it will not come out of that hole again.

12

I should have done that the first time.

13

Q

So it won't happen again?

14

A

Yeah, it won't happen again.
MR. HATCHETT:

15
16

Nothing further, Your Honor.

Thank you.

17

THE COURT:

All right.

You're welcome.

18

Thank you, Mr. Gray.

19

Mr. Carney, do you have any witnesses?

20

MR. CARNEY:

21

THE COURT:

Come forward and be sworn.

22

THE CLERK:

Please raise your right hand.

23

Do you solemnly swear or affirm that the testimony

Your Honor, I'd like to testify.

24

you're about to give will be the truth, the whole truth and

25

nothing but the truth, so help you God?

60

1

THE WITNESS:

2

THE CLERK:

3

MR. CARNEY:

4

THE COURT:

I do.
Please state your name for the record.
John Hatchett Carney.
Mr. Carney, before you begin,

5

Exhibit 5 to the receiver's motion is a letter on the date

6

of October 14th of 2016 that you sent to Mr. Guerra,

7

Mr. Morello and Mr. Wiand.

8

MR. CARNEY:

9

THE COURT:

Do you remember that letter?

Yes, sir.
And in it you categorically state

10

in capital letters:

11

or anyone purporting to be acting on your behalf onto the

12

Hatchett Ranch is trespassing.

13

all rights to salvage any equipment or pipeline.

You have forfeited any and

On whose behalf were you making that

14
15

You are advised that any entry by you

representation?

16

MR. CARNEY:

17

THE COURT:

On my own.
How about Mr. Jim Hatchett,

18

Byron Hatchett, Peter Gryska, Shannon Campbell, Sarah

19

Hatfield and Janece Tucker, did you have their authority to

20

send that letter to the receiver?

21

MR. CARNEY:

22

THE COURT:

23

I did this on my own, Your Honor.
And this included all 27 of those

parcels?

24

MR. CARNEY:

25

THE COURT:

Yes, sir.
Again, by what authority did you have

61

1

to tell the receiver to stay off the entire prop -- how much

2

of this property do you own?
MR. CARNEY:

3

I own an undivided fraction of all of

4

the oil and gas minerals.

5

by us, the surface is separately owned by the various family

6

members, but the oil interests are undivided, so we each

7

have a small fraction of the royalty interest.

8

THE COURT:

9

MR. CARNEY:
THE COURT:

10
11

The property is separately owned

For the entire property?
For the entire property.
And how much of this property do you

own?

12

MR. CARNEY:

13

THE COURT:

14

there any oil wells?

15

MR. CARNEY:

16

THE COURT:

17

MR. CARNEY:

18
19
20

1140 acres.
All right.

And on that 1140 acres are

Yes, sir.
Which ones?
The one depicted in Exhibit 1, and

the road -THE COURT:

Oh.

That road that you say was torn

up, is that on your property?

21

MR. CARNEY:

22

THE COURT:

23

MR. CARNEY:

25

THE COURT:

Okay.

And that -- where the oil was,

what did you call it?

24

Yes, sir.

The working pit.
Yeah.

Is that on your property?

62

1

MR. CARNEY:

2

THE COURT:

3

Yes, sir.
Is all the equipment that you claim

they can't have on your property?

4

MR. CARNEY:

5

THE COURT:

6

MR. CARNEY:

7

THE COURT:

Just some of it.
Some of it.
Some of it, the physical -Again, by what authority did you tell

8

the receiver to stay off the Hatchett Ranch when you don't

9

own all of the Hatchett Ranch?
MR. CARNEY:

10
11

Ranch.

12

I don't own all of the Hatchett

I own an undivided portion of all of the mineral

interests.
THE COURT:

13
14

I had entered in this receivership?

15

MR. CARNEY:

16

THE COURT:

17

MR. CARNEY:

18

I had been made aware of it -Why didn't you come to me?
Your Honor, I didn't because the

lease had expired.
THE COURT:

19
20

Were you aware of the orders that

But don't you understand that's my

determination to make and not yours?
Where is Mr. Gryska?

21

What's his position, do you

22

know?

Is it his position the lease is expired, or any of

23

the other people other than you and Mr. Hatchett here?
MR. CARNEY:

24
25

Campbell.

I've discussed it with Shannon

63

1
2

THE COURT:

Where is -- is it

Mrs. Campbell?

3

MR. CARNEY:

4

THE COURT:

5

MR. CARNEY:

6

THE COURT:

7

MR. CARNEY:

8

THE COURT:

9

MR. CARNEY:

10

Yeah?

THE COURT:

Yes.
Where is she today?
It's a he.

Shannon is a he.

Where is he?
He's in San Antonio.
Did he know about this hearing today?
I believe so.
So you've told me and Mr. Hatchett,

11

who is a lawyer, has told me that you're only here in your

12

own individual capacities.

13

MR. CARNEY:

14

THE COURT:

Yes, sir.
How can I adjudicate the rights of the

15

other people who have interest in this property?

16

me how I do that.

17
18
19

MR. CARNEY:

You tell

Your Honor, they're the same -- the

existence of the lease is the same as to everybody.
THE COURT:

They may come in and say, you know

20

something, I agree with Mr. Wiand's position, based on the

21

testimony of Mr. Gray, that prior to April 16th of 2016 the

22

receiver was taking action to drill a new well, et cetera,

23

that would bring it into the habendum clause.

24

that position.

25

They may take

What do I do then?

MR. CARNEY:

Your Honor, the activity of the

64

1

receiver is -- doesn't even pale compared to what is

2

required to preserve a lease after the primary term.

3

THE COURT:

4

If I accept the credibility of Mr. Gray, it seems

5

That's my determination though.

like he was acting prior to April 16th.
MR. CARNEY:

6

Your Honor, it's a well-adjudicated

7

issue, and the level of activity that is required to

8

preserve a lease after the primary term isn't even clearly

9

or potentially met.
THE COURT:

10

Again, how do I adjudicate the

11

interests of these other people?

12

receiver, if I believe you, Mr. Hatchett, stay off their

13

property?

14

MR. CARNEY:

Or do I just tell the

Well, Your Honor, the determination

15

of the validity of the lease is what we're asking -- that is

16

what -- what's brought us here today is Mr. Hatchett filed a

17

good faith request with the Railroad Commission to determine

18

whether the lease was valid.

19

around months after the lease expired.

20

for 120 days after the expiration --

21

THE COURT:

The receiver scrambled
The lease provides

I've read the lease.

I've read the

22

lease, but do you understand the quandary that I'm in?

23

What if Mr. -- apparently, according to Mr. Wiand, he's had

24

contact with Mr. Gryska and he's all for someone else coming

25

in and taking over, which seems to me at odds with your

65

1

position and Mr. Hatchett's position.
MR. CARNEY:

2

Your Honor, I think the testimony is

3

clear that of the 27 separate leases, there is only activity

4

at most on two or three tracks, so the -- all of the other

5

25 tracks no longer have a lease.

6

THE COURT:

7

Well, who owns those 25 tracks?

MR. CARNEY:

Well, one of them is mine.

The

8

location that they're describing as being staked, I don't

9

know where that is, but it's apparently on either Byron

10

Hatchett's or his sister Janece's part of the ranch.
THE COURT:

11
12

Is your sister aware of this

situation?

13

MR. HATCHETT:

14

THE COURT:

15

Any reason why she didn't say, hey, brother,

16

She is aware, Your Honor.

Any reason why she didn't come?

represent my interests?

You're a lawyer.

17

Do you understand the quandary I'm in?

18

MR. HATCHETT:

I understand exactly the quandary

19

you're in, Your Honor, but I am not authorized to speak on

20

behalf of the other mineral interest owners.

21

THE COURT:

And I know that and I appreciate that.

22

MR. HATCHETT:

And the only reason that they would

23

be involved in this particular hearing is because someone

24

claimed that I did, and I didn't, and I don't think

25

Mr. Carney did.

We were acting on our own.

66

1

THE COURT:

Okay.

2

MR. HATCHETT:

I understand.

The issue of the oil and gas lease

3

has to do with the minerals, and it doesn't really matter

4

who owns the surface, but the minerals are undivided, and so

5

whatever argument that we have about the minerals being

6

released should be released one or all, joint and severally.
THE COURT:

7

Well, what if Mr. Gryska comes in and

8

says, no, I disagree with your position, Mr. Hatchett and

9

Mr. Carney, or the other people?

What more do you have to

10

add to me?

11

you've brought out -- and by the way, you've done a very

12

good job.

13

that facetiously.

14

your interests here.

15
16

Other than what Mr. Gray has testified and

Are you sure you're not a lawyer?

You've done a very good job representing

MR. CARNEY:

THE COURT:

18

MR. CARNEY:

20

Sir, with all respect, I would never

violate a court order.

17

19

I don't say

Okay.
And the actions that I took, good

faith response.
THE COURT:

Let's clear that up right now, and

21

I don't want to cut off the receiver.

22

anything that's been done here would rise to a level of

23

contempt, although I think you should have consulted a

24

lawyer before you sent that letter, all right?

25

I don't find that

On an informal basis, do you know the position of

67

1

the other people involved with regard to the receiver's

2

actions of trying to sell the assets of Quest?

3

what their positions are?
MR. CARNEY:

4
5

Do you know

Your Honor, we buried Jim Hatchett's

wife two weeks ago.

6

THE COURT:

7

MR. CARNEY:

Well, I'm sorry to hear that.
I had the occasion to discuss

8

generally with some of the family, including Mr. Gryska, and

9

Your Honor, these wells have been producing some revenue for

10

the family for 50 years, and the receiver has had three

11

years to do something with them and he did nothing, and

12

they've scrambled around at the end to try and fix their

13

problem, but they let the lease expire without doing

14

anything.
THE COURT:

15

You didn't answer my question.

16

Assuming he can find a buyer for the assets of Quest that

17

would start generating revenue, do you know what the

18

position of the other people are?
MR. CARNEY:

19
20

in there.

21

THE COURT:

22

MR. CARNEY:

23

Okay.
They want to control the lease terms

that are negotiated with the new person.
THE COURT:

24
25

They want to get a qualified driller

Mr. Wiand?

Okay.

Can that be accomplished,

68

MR. WIAND:

1

Your Honor, it absolutely can be, and

2

in my conversation with Mr. Gryska we talked about that and

3

he was also in favor of me going forward with this, and

4

I have on the table right now a proposal that the buyer

5

wants to close by April 10, that won't happen, but that's

6

what they're proposing, and it's acceptable terms to me, and

7

so I -- you know, and I believe these people are

8

well-qualified to do this business, so --

9

THE COURT:

What's their name?

10

MR. WIAND:

It's called PROCONSULT International

11

LLC.

It's a group of petroleum consultants that invest and

12

operate properties for investors.

13

THE COURT:

Are you aware of them?

14

MR. CARNEY:

15

THE COURT:

16

MR. HATCHETT:

17

THE COURT:

Where are they from, Mr. Wiand?

18

MR. WIAND:

The five principals are from various

No, sir, I've never heard the name.
Mr. Hatchett?
I'm not aware of them, Your Honor.

19

places, some from Calgary, there's a couple in Texas, and

20

there's some in other parts of the United States.

21

THE COURT:

Well, assume, you know, I agree with

22

your position and I say the lease is terminated, who are you

23

going to go to?

24

MR. CARNEY:

25

MR. HATCHETT:

Your Honor -Your Honor, if I might be

69

1

permitted?

2

THE COURT:

Sure.

3

MR. HATCHETT:

Yes, sir.

There's an old adage, if you want

4

things done right, do it yourself.

5

expire.

6

that is willing to lease the Hatchett lease today.

7

will not do so unless we get a release from the lease from

8

the receiver.

9

Court that no one will love the land or take care of it

10

The lease is about to

I myself went and put together an investment group
They

I will be the operator, and I can assure this

better than myself.
THE COURT:

11

But, you know, that's all well and

12

good, what about these people who want their money back, the

13

claimants?

14

MR. HATCHETT:

Well, I understand their position.

15

Our family has also suffered collateral damage because we

16

have had an income stream cut off from us.

17

to this Court that I have discussed this with my uncle, my

18

cousins, every one has agreed to sign a lease with me upon

19

the release of this oil and gas lease.

20

reported to me from Peter Gryska, Jim Hatchett, Sarah

21

Hatfield and all the other mineral owners.

22

waiting for is a release.

23

I would purport

That was what's been

All we're

We had a situation where this lease was coming to

24

a close, and the receiver has done nothing to perpetuate

25

this lease beyond the primary term, and when it terminated,

70

1

we waited, because the lease calls for 60 days they're to

2

give us a release; this they did not do.

3

there's no production, they need to plug the wells, but they

4

have an extension, but -- the extension was made in December

5

of 2016, but they didn't have a valid lease, and they --

6

I believe that's one of the exhibits, I think number 3 in

7

the response, but if they don't have a valid lease, they

8

have nothing to sell, it's evaporated.

And then since

9

I understand at one time it was a very important

10

asset for the receiver and for the SEC, but their inaction

11

caused this lease to lapse, and I don't know how they can

12

revive that.

13

leasing term or they are drilling a well at the end of the

14

primary term.

15

will not hold that lease unless they're actually drilling in

16

the ground, and nothing that they've done according to Texas

17

law would perpetuate this lease beyond the primary term.

18

Now, I understand the SEC is trying to recover

Either they have production or they have the

All the preparations they've talked about

19

funds for defrauded people and I think that's a noble cause.

20

Quest got involved in some regard, which I don't understand

21

how they were, but obviously they were part of this Ponzi

22

scheme; but for the receiver now to try to sell a

23

nonexistent lease to some other operator to me sounds like

24

fraud in itself.

25

THE COURT:

Watch out, Mr. Hatchett.

71

1

MR. HATCHETT:

2

THE COURT:

3

MR. HATCHETT:

4
5
6
7
8
9
10

I understand, but --

Watch out.
-- they can't sell what they don't

have.
THE COURT:

I understand that.

That's a decision

I'll have to make.
MR. HATCHETT:

I understand.

I understand that,

Judge, and I'll -THE COURT:

Why didn't you come to me first?

MR. HATCHETT:

Well, Judge, when they filed some

11

of the stuff they did with the Railroad Commission, they

12

availed themselves to their authority on how to conduct

13

business in the State of Texas.

14

I believe the lease is expired and there's no production,

15

and so I asked the Railroad Commission to do a good faith

16

claim hearing to determine whether or not they could do what

17

they were doing.

18

Commission said, you need to contact the receiver and find a

19

mutual date, a mutual date to have a hearing.

20

Mr. Guerra.

21

I questioned that because

I asked for that, but the Railroad

I contacted

He would not give me a date.

In the interim time, I reviewed your order and

22

I did a lot of study, and I contacted a lot of people that

23

were both -- one of them was a magistrate like yourself for

24

16 years in the Federal Court, and he said, you need to go

25

to the Federal Court, and so when the ball came back into my

72

1

court, into my side -- because in order to have a hearing

2

with the Railroad Commission I had to write a letter and I

3

had to fill out the form asking for that official hearing,

4

and this I did not do because I realized that the only place

5

that has the authority is sitting right here, and so when

6

they were filing the things with the Railroad Commission,

7

I was trying to counter that with the Railroad Commission,

8

but now I see that in order for the Railroad Commission to

9

make that determination would ultimately end up taking that

10

asset from them in their mind, and so I did not ask for that

11

hearing to be finalized, there was no hearing before the

12

Railroad Commission, because I realized that this is the

13

court of continuing jurisdiction and you have authority.

14

But I want the Court to understand that my entire

15

motivation in this is to be a good steward of what I've

16

inherited and to do right by the people that I care about,

17

my family, although I don't represent them in any kind of

18

legal capacity, but I still want to see good for them and

19

I want to see the collateral damage that's happened to them

20

in this entire problem to cease, and we would like to pursue

21

another course and try to get our minerals taken care of and

22

produced but to have the land taken care of.

23

well bores that need to be plugged, and if they don't have a

24

valid lease and they don't have a valid plugging extension,

25

they need to plug the wells.

We have ten

73

1

Now, the truth of the matter is, since this is a

2

receivership, similar to a bankruptcy, all the receiver

3

would have to do is send a letter to the Railroad Commission

4

and say that Quest does not have the money in its estate to

5

plug these wells.

6

them on what they call the orphan well program and the wells

7

would be plugged by the taxpayers of Texas.

8
9

The Railroad Commission would then put

Now, I'm concerned because I have two of the well
bores on the land that I have inherited, one of them is a

10

problematic saltwater well and the other one is just open,

11

and those things need to be addressed.

12

is that steel and saltwater don't mix very well, and the

13

longer there's inactivity, the more problematic it becomes

14

that something bad is going to happen.

15

those wells need to be plugged.

16

The reality of it

It's my opinion that

Now, the group that I have put together are

17

willing to drill ten new wells, new casing, new cement,

18

everything.

19

40 years old, they were first drilled in the '70s, and

20

they're old, they're wore out, and as far as I'm concerned

21

they're no longer a viable asset, because you can never

22

bring them back online after the inactivity that's taken

23

place over the last three years and I will say five or six

24

years prior to that.

25

problematic and they need to be plugged.

The wells that are in place now are over

But these wells are old, they're
That's my concern

74

1
2

as a landowner.
As a mineral owner, I want to see my minerals

3

developed, I want to see benefit to my family, and the last

4

four operators, Your Honor, have been less than prudent in

5

taking care of things.

6

So my motivation here is to preserve the land,

7

protect it, and to be a good steward of my inheritance and

8

to try to develop those minerals.

9

I know that because it's a receivership situation

10

there's no way to sue for tortious interference of business

11

or things of that nature, but we can bring this matter to a

12

close if the receiver would simply realize that they have

13

lost the term of the lease and they did nothing to

14

perpetuate it.

15

thing that will really perpetuate it beyond the primary

16

term, and if they're going to claim some kind of activity,

17

they actually have to be digging in the ground, under Texas

18

law, to preserve that.

19

or even staking a well or putting a location or making

20

application for a permit is simply not enough.

21

There's no production.

That's the only

Just preparation as far as planning

So what we would ask, one, is leave of court to

22

either file this with the Railroad Commission to make that

23

determination or for this Court to make the determination

24

that this lease has in fact come to an end and then let us

25

continue on with life.

75

1
2

THE COURT:

So the Railroad Commission has the

authority --

3

MR. HATCHETT:

4

THE COURT:

5
6

Well, the Railroad Commission --

Has the authority to say this lease is

or is not valid?
MR. HATCHETT:

I don't believe they have the

7

actual to say whether it's valid or not, but they can

8

determine whether or not they have a good faith claim,

9

either they have term or they have production, and I believe

10

the answer would be, yes, they would determine whether it's

11

a good faith claim.

12

THE COURT:

All right.

13

MR. HATCHETT:

This Court also has that ability

14

and can read the lease and see, but the Railroad Commission

15

is the governing body that determines oil and gas matters.

16

There's some other discrepancies that's been filed

17

that are concerning, and maybe that's at a later date to

18

take that up, but they made extensions to plug these wells

19

making claims that aren't true, or what I believe are not

20

true, and so they wouldn't be entitled to the plugging

21

extension, and I think that's really the crux of the matter.

22

THE COURT:

23

MR. MORELLO:

Mr. Morello?
Just -- I'll be brief, Your Honor,

24

but going back to the original issue about the lack of

25

authority Mr. Carney or Mr. Hatchett have to act on behalf

76

1

of the other interest holders, Mr. Gryska, who as we

2

mentioned before is one of the interest holders, sent my

3

firm an e-mail on March 14th.

4

I'm going to quote two short paragraphs, it says:

5

I have never -- and he puts "never" in all caps -- appointed

6

or asked neither John Carney nor Byron Hatchett to be my

7

attorney or representative.

8

Hatchett and told John Carney the same, that he not -- "not"

9

in all caps -- proceed with any independent deals concerning

Included in the e-mail, and
Lastly,

I specifically asked Byron

10

the Hatchett lease until the bankruptcy court and the

11

receiver had released the leases in writing.

12

and I spent two years and thousands of dollars dealing with

13

and extricating ourselves from our cousin John's IRS lawsuit

14

and do not wish to be embroiled with him nor Byron again.

15

My brothers

So I think that pretty much makes clear that

16

Mr. Carney and Mr. Hatchett do not have the support of all

17

of the lienholders.

18

While Mr. Hatchett and Mr. Carney are in a

19

position where they are feeling the effects of the

20

receivership, as anyone that has any connection to the

21

receivership, unfortunately that's the way these things play

22

out, that's the way these frauds play out, and there's a

23

claims process which they have not availed themselves of

24

through which they could seek any redress they believe

25

they're entitled to, but one thing that the order makes

77

1

clear is that they're not entitled to engage in self-help,

2

and that's precisely what has happened.

3

Bill Hatchett, Mr. Hatchett's father, stepped into

4

the officer of the receiver the first time the receiver made

5

a trip to this part of Texas, the Quest office, and

6

Mr. Hatchett at the time made it clear that he was going to

7

take things into his own hand in an effort to pull back the

8

lease from the receivership.
It started right off at the beginning when, back

9
10

in 2013, the same year the receiver was appointed, there had

11

been some oil that had been -- some of this oil that we're

12

discussing here that had been collected, typically there's a

13

company called Transoil that sells the oil and then pays

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off -- the short of it is pays off all the interest holders.

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Mr. Bill Hatchett went to Transoil and told them that this

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Hatchett lease had been terminated and that the receiver had

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no right to anything.

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proceedings and efforts by the receiver and the attorneys

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with my firm to come to some sort of resolution with the

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Hatchetts, and I think it's made clear from the record that

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we have countless times pointed them to paragraph 15 of the

22

order that enjoins anyone from disturbing receivership

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assets.

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25

That required two years of

So I think, you know, part of the reason that we
are here today -- and I know Mr. Hatchett now recognizes the

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Court's authority, but this is four years later.

2

times we've indicated to them that the order limits their

3

ability to act -THE COURT:

4
5

Why hasn't more oil been produced,

Mr. Morello, during this period of time?
MR. MORELLO:

6
7

Countless

I think the receiver can answer

that.

8

THE COURT:

All right.

9

MR. WIAND:

Your Honor, as you'll recall, when

10

this was brought into receivership, I essentially had a

11

separate receivership over this.

12

my representation to the Court that I was not going to

13

utilize the assets from the other part of the receivership

14

in order to support this thing, so we have been managing and

15

operating this -- these oil properties in that light.

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It was the Court's -- and

We have been undertaking various different steps

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with respect to this property in light of the fact of the

18

funds and assets that were available to do it.

19

testified early on, we attempted a workover, we attempted

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subsequent workovers to try to get wells producing.

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done in a way, frankly, that was to try to get this

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producing and to -- and to do it in a way -- in light of

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what the capital was that I had to put into it.

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25

As Mr. Gray

It was

The last portion of what we did is after it was
determined that that injection well was not going to produce

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more oil, we had been advised and consulted with geologists

2

that we could drill some shallow wells without significant

3

expense and begin production at that point in time, and

4

that's what we proceeded to do beginning in March, April,

5

whatever, preparing to drill those wells.
But, Judge, these are old wells.

6

I think

7

Mr. Hatchett is right, the wells that exist there have been

8

around for a long time.

9

producing with them, the expense or the likelihood of

With respect to reworking and

10

production from them was not great, other activities need to

11

be engaged in, and that's the reason I have been continually

12

working to try to bring in an appropriate operator with

13

appropriate funds in order to do what might bring more oil

14

and production for these people out of this -- out of this

15

property.
THE COURT:

16
17

He mentioned that there are ten wells

that, what did you say, need to be capped?

18

MR. CARNEY:

19

THE COURT:

20

MR. HATCHETT:

21

Plugged.
Plugged?
Yes, Your Honor, there's ten open

well bores that need to be plugged.
MR. WIAND:

22

And those ten open well bores that

23

need to be plugged have probably been in that situation for

24

20 years.

25

the Downeys' time, and they were that way when the -- when

They certainly were in that situation throughout

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the receivership became -- administering these properties,

2

and I take issue with the fact, with respect to the Railroad

3

Commission, that we have done anything inappropriate with

4

respect to that Railroad Commission in advising them what we

5

were doing, posting a bond and complying with the

6

requirements with respect to our plugging operations, and if

7

my present proposal goes through, that new operator, or if

8

he takes over this operator, will undertake those

9

responsibilities and continue going with it.

10
11
12
13
14

So I think this -- this plugging thing is a bit of
a red herring.
THE COURT:

All right.

Well, Mr. Morello, they

claim the lease expired on April 16th of last year.
MR. MORELLO:

Well, we believe, based on the

15

testimony of Mr. Gray, that sufficient activity has been

16

taking place from before and after the lease expired, or the

17

original five year term expired, to trigger the provision

18

that allows it to continue, to remain in the hands of the

19

receivership.

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THE COURT:

21

MR. MORELLO:

Specifically?
Specifically, ever since about March

22

or -- February or March of 2016 the receiver has been taking

23

steps to drill a new well, and drilling is one of the

24

activities that triggers the additional time period.

25

THE COURT:

Well, but it says lessee is then

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1

engaged in drilling or reworking operations.

2

taking steps to drill but never drilled.

3

MR. MORELLO:

You were

Well, there's -- Your Honor, there

4

are specific things that have to take place before the

5

drilling could occur, and that was -- there was no physical

6

drilling, that's correct, Your Honor, but there were steps

7

taking place at the time to be able to begin drilling,

8

including getting the permit and geological survey and all

9

those other things.

10

MR. CARNEY:

There's no ambiguity in this

11

language, Your Honor, and at best they would hold three

12

tracks, three 160-acre tracks, 480 acres, or approximately

13

10 percent of the ranch, is all they could possibly hold if

14

planning constituted sufficient habendum clause activity to

15

perpetuate the lease, and it doesn't even come close, and if

16

the Court is going to make a determination on it, we'd like

17

to be able to brief the status of the Texas law and the

18

requirements of the habendum clause, because it's crystal

19

clear, it's been litigated for 100 years, and the -- well,

20

since the '30s, when it came, so 70 years.

21

But the planning -- the clause wouldn't have any

22

meaning if thinking about doing something was sufficient

23

activity to be doing it, because everybody could say they

24

were thinking about it.

25

MR. MORELLO:

It's not -- it's clear.
Your Honor?

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THE COURT:

2

MR. MORELLO:

Yes.
Can I quote the specific language

3

under which we're operating?

4

than --

5

THE COURT:

6

MR. MORELLO:

It's a little bit broader

All right.

Go ahead.

And specifically -- and this is in

7

paragraph 5 of the lease.

If after the expiration of the

8

primary term of this lease, and after oil or gas is produced

9

from said land, which had occurred during the main term of

10

the lease, the production thereof should cease from any

11

cause, this lease shall not terminate -THE COURT:

12
13

Where are you in that

paragraph 5?
MR. MORELLO:

14
15

Wait a minute.

sentence.

Let's see.

It's the second full

It's the second clause that begins with an "if."

16

THE COURT:

17

MR. MORELLO:

All right.

I see it.

So going back to where I left off,

18

this lease shall not terminate if lessee commences

19

operations for drilling or reworking production thereof.

20

I'm sorry, for drilling or reworking within 60 days after

21

the cessation of such production.

22

So our contention is the activities that were

23

taking place satisfied the "commences operations for

24

drilling" language of this document.

25

THE COURT:

All right.

Let's do this.

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MR. CARNEY:

1
2

Your Honor, that's 60 days.

They

have --

3

THE COURT:

Hold on, Mr. Carney.

Hold on.

4

All right.

I don't find anything has been

5

presented to me which would justify me issuing order to show

6

cause to Mr. Hatchett and Mr. Carney or anybody else,

7

all right?

8
9

So that motion is denied.
The motion for leave to file suit for damages and

declaratory relief, I'm going to deny that.

However, I'm

10

a little concerned about the issue of this lease, and it

11

would seem to me that Texas law governs with regard --

12

habendum, right?

13

MR. CARNEY:

14

THE COURT:

Yes, sir.
So I'm going to give everybody a

15

chance to brief this issue.

16

an important issue to the -- not just to the receiver, but

17

the defrauded people and also to Mr. Carney and

18

Mr. Hatchett.

19

It's an important issue.

It's

You know, I'm still -- Mr. Hatchett -- or,

20

Mr. Carney, what was Mr. Gryska referring to in his e-mail

21

about you and some IRS lawsuit?

22

MR. CARNEY:

23

Your Honor, I had a 30 year battle

with the IRS over a tax shelter from 1984.

24

THE COURT:

25

MR. CARNEY:

1984?
Yes, sir.

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THE COURT:

2

MR. CARNEY:

3

THE COURT:

4

MR. CARNEY:

5

Is that lien still there?
No, I paid that off in September of

THE COURT:

Were you aware there was a lien,

MR. WIAND:

No, Your Honor.

Mr. Wiand?

8
9

Well, they filed a lien on the ranch.

last year.

6
7

And how is he involved?

I don't know who they

might have noticed that to, but I was not aware that it had

10

been liened, otherwise, Judge, if I would have known they

11

were liening my interest, I probably would have been back to

12

see you, so --

13

THE COURT:

14

MR. CARNEY:

15

All right.
They sued Mr. Gryska too, that's why

he got it.

16

THE COURT:

17

Did they sue everybody who had an interest in the

18

Hatchett lease?
MR. CARNEY:

19
20

Well, I would imagine.

That was related to me directly,

yeah.

21

THE COURT:

What's your relation to Mr. Gryska?

22

MR. CARNEY:

23

THE COURT:

24

MR. HATCHETT:

25

THE COURT:

He's my first cousin.
And to you, Mr. Hatchett?
He's a second cousin, Your Honor.

Okay.

All right.

How much time do

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you want to brief the issue?

2

MR. CARNEY:

3

THE COURT:

4

MR. HATCHETT:

5

trial schedule.

Two weeks.
Mr. Hatchett?
Your Honor, I have a pretty heavy

I would ask for more time than two weeks.

6

THE COURT:

7

MR. HATCHETT:

8

I have a manslaughter case that's coming up that's

9

All right.

THE COURT:

11

MR. HATCHETT:

12

THE COURT:

13

MR. HATCHETT:

14

THE COURT:

16
17

Can we have four weeks?

going to require --

10

15

How much time?

You do criminal defense work?
Sorry?

You do criminal defense work?
Yes, sir.

Texas is unique.

The jury sets the

sentence, don't they?
MR. HATCHETT:

You can go either to the judge or

the jury, Your Honor.

18

THE COURT:

That's an elective that you make?

19

MR. HATCHETT:

20

THE COURT:

21

MR. HATCHETT:

It's an elective that you can make.

That's interesting.
If it please the Court, I've tried

22

three jury trials this year, I have two more this coming

23

month, so I have a heavy trial schedule.

24

THE COURT:

All right.

25

THE CLERK:

22nd, Judge.

Well, is today the 23rd?

86

1

THE COURT:

22nd?

2

MR. WIAND:

Your Honor, if I might add, with

3

respect to what I'm doing with respect to these folks that

4

made a proposal to me, I have never been in this

5

receivership less than open with anybody who wanted

6

information about what we were doing or whatever.

7

of these gentlemen have ever contacted me for any reason.

8

I'll be happy to share with them what we're doing and I'll

9

be happy to put them in touch with these people to see if

10

Neither

that's what it is, that might ease things.

11

I know the briefing process is going forward, but

12

I just want to make sure they're quite aware that phones in

13

Texas will actually call Florida, and I'm there and I'm

14

ready to help them out and explain to them what I'm doing,

15

as I did with Mr. Gryska, sir.

16

MR. CARNEY:

Your Honor, I've been in contact with

17

their lawyers for three lawyers now.

18

with the receiver, but I've dealt with the law firm for

19

three years.

20

THE COURT:

So I haven't spoken

Well, speak with the receiver.

21

I mean, this is a new development, all right?

22

to be objective and reasonable and act in good faith and

23

this may all resolve itself.

24
25

All right.

Let's all try

Everybody file their briefs no later

than April 19th, and then I'll try to expedite it.

87

Now, what's going on on the property itself?

1
2

anybody --

3

MR. CARNEY:

4

THE COURT:

5

MR. CARNEY:

6

9

Absolutely nothing.
Is anybody overseeing it?
It's -- there is family that lives on

the property.
THE COURT:

7
8

Is

there?

What about this equipment that's

Is it deteriorating?
MR. HATCHETT:

Your Honor, due to the inactivity,

10

I believe that the equipment that they spoke of now has gone

11

from salvage to scrap.

12

the lack of proper maintenance, I believe that it is -- now

13

just needs to be hauled off and sold as scrap.

14

believe that the clause says that if they had 120 days from

15

the end of their lease to come and get it --

16

THE COURT:

17

I'm afraid that the lack of use and

But I do

Well, that's assuming I find the lease

ended on April 16th.

18

MR. HATCHETT:

19

THE COURT:

I understand.

What do you say to that, Mr. Morello?

20

Do you want to just leave the status quo, the property just

21

stays as it is?

22

MR. WIAND:

Your Honor, Mr. Gray and the fellow

23

that works with him would be continuing to attend to the

24

matters on the lease except that we've been told to get off

25

the lease, and Mr. Gray said that he was told not to go back

88

1

there.

That was my direction.

This is out in Texas.

2

I don't want anybody saying that we're trespassing or

3

anything.

4

I doubt they're in harm's way, but I don't want them going

5

on there creating any problems.

I don't want to put these people -- I mean,

6

THE COURT:

7

I'll endeavor to rule as quickly as I can.

8

can get your memos in before then, so be it.
All right.

9
10

I'll just leave the status quo.

Thank you.

interesting.

11

MR. MORELLO:

12

MR. HATCHETT:

13

MR. CARNEY:

14

THE COURT:

15

It's been very

Thank you, Judge.
Thank you, Your Honor.
Thank you, Your Honor.
Have a safe trip back to Texas.

9-CV-87.

16

- - - - -

17

(Proceedings concluded at 12:42 p.m.)

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- - - - -

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If you

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C E R T I F I C A T E

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3

This is to certify that the foregoing transcript

4

of proceedings taken in a motion hearing in the United

5

States District Court is a true and accurate transcript of

6

the proceedings taken by me in machine shorthand and

7

transcribed by computer under my supervision, this the 30th

8

day of March, 2017.

9
10
11

/S/ DAVID J. COLLIER

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13

DAVID J. COLLIER

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OFFICIAL COURT REPORTER

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